Corrigendum to “A Gaussian Approach for Continuous Time Models of the Short Term Interest Rate"

Peter Phillips and Jun Yu

No 18-2010, Working Papers from Singapore Management University, School of Economics

Abstract: An error is corrected in Yu and Phillips (2001) (Econometrics Journal, 4, 210-224) where a time transformation was used to induce Gaussian disturbances in the discrete time equivalent model. It is shown that the error process in this model is not a martingale and the Dambis, Dubins-Schwarz (DDS) theorem is not directly applicable. However, a detrended error process is a martingale, the DDS theorem is applicable, and the corresponding stopping time correctly induces Gaussianity. We show that the two stopping time sequences differ by O(a2), where a is the pre-specified normalized timing constant.

Keywords: Nonlinear Diffusion; Normalizing Transformation; Level Effect; DDS Theorem. (search for similar items in EconPapers)
Pages: 5 pages
Date: 2010-10
New Economics Papers: this item is included in nep-ecm and nep-sea
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Published in SMU Economics and Statistics Working Paper Series

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